I know...you've heard this from me before. But it is such an important issue that I am going to keep reminding you.
The IRS repeatedly warns that S corp. owners must pay themselves “reasonable compensation”. Despite warnings, S corporation owners often neglect to put themselves on payroll…that is a regular payroll checks with tax payments for withholdings, filing W-2s, etc. Instead, many owners take out cash as a draw or distribution.
The IRS is on to this, is looking for it and you could be at-risk for an audit. The IRS will attempt to re-characterize all those draws as wages and subject them to all applicable payroll taxes. This re-characterization triggers back taxes, penalties and interest and have bankrupted other small businesses and owners.
So, you should pay yourself “reasonable compensation”. If you are unclear what that means, please call me. Together we can go through the steps needed to prevent an unwanted and painful IRS audit.
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